☠️Liquidations - NUKE

This page will give readers a better understanding of liquidations on Nukem Loans

Liquidations are accessed in NUKE section in NUKEM INVEST interface:

Nuke section

Once clicked, the NUKE section presents all open borrowing positions on a specific network:

Nuke section is showing all open borrowing positions

• Market - Indicates the market for which the position is open. (The first asset in the name represents Debt, and the second asset represents collateral.)

• Collateral - Displays the current collateral value and asset.

• Debt - Shows the current debt value and asset.

• Collateralization - Reflects the current ratio between Debt and Collateral values for a specific position. Collateralization changes as prices of Debt and Collateral assets fluctuate and as interest accumulates.

• Treshold - When Collateralization reaches this level, the position will be liquidated.

• Margin - Represents the remaining buffer between current Collateralization and the Threshold. The higher this value, the less risky the position.

• Price - This metric shows the price that liquidators need to pay in order to liquidate a specific position. This metric becomes visible only when the position is eligible to be liquidated.

• Nuke - This button becomes 'Active' once the position is eligible to be liquidated

'Active' Nuke button

To liquidate a specific position, liquidators should click on a NUKE button.

After initiating the liquidation process by clicking on the 'NUKE' button, users will be directed to the 'DEPOSIT CREDIT' interface, where they are required to deposit assets specifically designated for liquidation — these assets align with the position's debt.

To expedite the process, users have the option to deposit assets into the staked credit pool in advance. This enables them to bid immediately when a position becomes liquidatable. Auctions follow a reverse dutch style, starting with a high price that decreases linearly over time. The successful liquidation is determined on a first-come, first-served basis.

Liquidating essentially involves the user repaying a debt for a specific liquidatable position, and in return, they receive collateral valued slightly higher than the repaid debt.

How protocol determines liquidation price?

Tokens listed on Nukem Loans as lending/borrowing assets are using Decentralized Exchanges such as Uniswap, Sushiwap and Pancakeswap for accomodating their liquidity. These exchanges are also called Automated Market Makers since they enable instant execution of any trade between two assets (pair). To determine the price between these assets they are using constant product formula.

Pairs act as automated market makers, standing ready to accept one token for the other as long as the “constant product” formula is preserved. This formula, most simply expressed as x * y = k, states that trades must not change the product ( k ) of a pair’s reserve balances ( x and y ). Because k remains unchanged from the reference frame of a trade, it is often referred to as the invariant. This formula has the desirable property that larger trades (relative to reserves) execute at exponentially worse rates than smaller ones.

To mitigate bad debt situations and ensure comprehensive liquidations in NUKEM LOANS, the value of collateral is NOT the same as the face value. Protocol takes into account depth of liquidity pool and size of the collateral to determine real collateralization ratio and actual "liquidatable" value.

Token amounts (and therefore prices) in the pool are changing with every trade

Lets look at an example of collateral value difference before and after succesful liquidation: Step 1: Before liquidation

Mark	Asset	Amount
x	USDT	10000
y	MEME	1000

k = x * y = 10,000 * 1,000 = 10,000,000 Token ratio: 10/1 MEME price = 10 USDT

Step 2: Liquidation

100 MEME tokens used as collateral have been liquidated. Face value of 100 MEME tokens should be 1000 USDT. But because of changing ratio in liquidity pool the real value of 100 MEME tokens is different and therefore liquidation point and collateralizations are different.

Step 3: After liquidation

Mark	Asset	Amount
x	USDT	9090.91
y	MEME	1100

k = x * y = 9,090.91 * 1,100 = 10,000,000 Token ratio: 8.26/1 MEME price = 8.26 USDT

Step 4: Real value of collateral

As shown, the real, "liquidatable" value of 100 MEME tokens is = 826 USDT instead of face value of 1000 USDT. By observing and determining the real instead of the face value of tokens used as collateral, protocol managed to get better risk evaluation by 17.4% for this example.